The Dollar a 'Commodity Currency'? It Just Might Happen

The United States is in the midst of a surge in energy production, one that could realign one of the market's most reliable barometers: the inverse link between the U.S. dollar and oil.

Generally speaking, what's good for the dollar tends to be negative for oil, and vice versa—but the U.S. oil boom might be altering that rule of thumb.

With the U.S. suddenly awash in oil and gas, it has raised the question of whether the greenback can join the ranks of the dollars of Canada and Australia or the krone of Norway as a "commodity currency"—which tend to correlate directly with the price of oil.

"Energy is no longer a source of cost [for the U.S.] but a source of profit and employment," said Alessio de Longis, a portfolio manager at OppenheimerFunds.

"The case for the U.S. to become a net energy exporter is probably far away in the future," he added, "but what we are already seeing…is the correlation between the dollar and energy has been much weaker."

According to de Longis, the negative correlation between the greenback and oil has currently fallen to zero, becoming more similar to the link between crude and the currencies of Canada and Australia. Those two currencies normally trade with oil 50-60 percent of the time, but that positive correlation has dropped to 20-30 percent recently.

Calling surging U.S. production a product of an "aggressive exploration of shale resources," Bank of America said U.S. output has jumped to 7.3 million barrels of oil per day, "with production in the Lower 48 states increasing at a yearly rate of 920 thousand b/d, or 22 percent."

Real Effects of Boom Aren't Here Yet

For now, the U.S. has miles to go before it reaches the echelon of an Oil and Petroleum Exporting Country (OPEC) powerhouse, or even a non-OPEC country that exports oil. Additionally, the fact that the U.S. still imports most of its crude – and has yet to export its own bounty – is an immediate barrier to the greenback evolving into a commodity currency.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said that because the U.S. economy is highly diversified, the dollar is unlikely to trade like a petro-based currency. The massive capital flows that find their way into U.S. assets will still be the biggest determinant to the dollar's levels, he said.

"The way I can see the energy story helping the dollar is through importing less, and our cheaper energy…would locate more manufacturing here," Chandler said. As a result, foreign customers "will be able to buy more of what's built here."

Currently, the world's largest energy consumer is importing far less energy – oil imports recently plunged to their lowest levels in nearly 20 years. That has implications for other countries that rely heavily on energy imports, as well as their currencies.

"We're really talking cycles into the future" for the dollar to become positively correlated with oil, said Oppenheimer's de Longis. However, "the immediate consequence is the switch from the dollar to yen as the clearest negative correlation to energy."

Indeed, Japan's energy costs have skyrocketed as the yen has plunged and the Bank of Japan has hypercharged its monetary policy. "In terms of swings and changes [to energy prices], Japan is most exposed to fluctuations in energy markets," said de Longis.